Sustainable Shadow Banking†

Sustainable Shadow Banking†
Ordoñez, Guillermo
2018-01-01 00:00:00
AbstractBanking regulation is beneficial because it constrains banks' portfolios to prevent excessive risk taking. But given that regulators usually know less than a bank about its investment opportunities, regulation comes at the cost of foregoing profitable investments. I argue that shadow banking improves welfare because it provides a channel to escape excessive regulation that is asymmetrically more valuable for banks with access to efficient investment opportunities. I propose a novel intervention that improves welfare further by taxing shadow activities, subsidizing regulated activities and allowing banks to self-select into being regulated or not. (JEL D82, G21, G28, G31, G32, L25)
http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.pngAmerican Economic Journal: MacroeconomicsAmerican Economic Associationhttp://www.deepdyve.com/lp/american-economic-association/sustainable-shadow-banking-tTtmOvR1dQ

Abstract

AbstractBanking regulation is beneficial because it constrains banks' portfolios to prevent excessive risk taking. But given that regulators usually know less than a bank about its investment opportunities, regulation comes at the cost of foregoing profitable investments. I argue that shadow banking improves welfare because it provides a channel to escape excessive regulation that is asymmetrically more valuable for banks with access to efficient investment opportunities. I propose a novel intervention that improves welfare further by taxing shadow activities, subsidizing regulated activities and allowing banks to self-select into being regulated or not. (JEL D82, G21, G28, G31, G32, L25)